Form 926 Reporting Transfers to Foreign Corporations: Avoiding Harsh Penalties FOR LIVE PROGRAM ONLY TUESDAY, JULY 31, 2016, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at 1-800-926-7926 ext.1 (or 404-881-1141 ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please e-mail sound@straffordpub.com immediately so we can address the problem.
Form 926 Reporting Transfers to Foreign Corporations: Avoiding Harsh Penalties TUESDAY, JULY 31, 2018 Ryan Charles Gaglio, Shareholder Stradling Yocca Carlson & Rauth, Newport Beach, Calif. rgaglio@sycr.com John Garcia, CPA Corporate Tax Advisors, Foothill Ranch, Calif. john.garcia@cpa.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Ryan C. Gaglio John P. Garcia July 31, 2018 Webinar
John Garcia, CPA, MBA is an owner of Corporate Tax Advisors, an international tax consulting firm. John has over 25 years of experience in tax including heading up tax departments for large multinational firms. John Garcia, CPA, MBA CTAX Corporate Tax Advisors 26632 Towne Centre Drive #300 Foothill Ranch, CA 92610 JOHN.GARCIA@CTAXADVICE.COM 6
Ryan Charles Gaglio, Shareholder STRADLING YOCCA CARLSON & RAUTH, P.C. Ryan Charles Gaglio is a shareholder in Stradling's Corporate and Securities and Tax practices groups. Ryan s practice focuses on M&A transactions with a particular emphasis on tax planning, including the federal, state and local tax consequences of acquisitions, taxable and tax-free mergers, and public and private tender offers. He also advises companies and executives in connection with executive compensation matters. In addition, Ryan has significant experience in federal, state and local tax controversies and disputes and has successfully represented clients at all stages of proceedings before the IRS, the California Franchise Tax Board and the California State Board of Equalization, as well as in tax controversies before the U.S. District Court and the U.S. Tax Court. Ryan was awarded the annual Tax Law Section Award for 2016 by the Orange County Bar Association. In 2015 and 2016, Ryan was named a "Southern California Rising Star" by Super Lawyers. Featured Representation Represented MagnaCom, a digital communications company, in its acquisition by Broadcom Limited. Represented Media Properties Holdings, a portfolio company of The Carlyle Group and H.I.G. Growth Partners, in its acquisition by Cannella Response Television. Represented Instantly, a provider of online and mobile audiences and insights technology tools, in its sale to Survey Sampling International. Represented Inventus Solutions, a portfolio company of Clearlake Capital Group, in connection with its sale to RPX Corporation (NASDAQ: RPXC). Represented emobus, a provider of managed mobility services, in its acquisition by Asentinel, a Marlin Equity Partners portfolio company. Represented Ansible, an Enterprise IT automation company, in its sale to Red Hat (NYSE: RHT). Represented Skylight Healthcare Systems, an interactive patient care company, in its acquisition by GetWellNetwork, a portfolio company of Welsh, Carson, Anderson & Stowe. Office: Newport Beach rgaglio@sycr.com (949) 725-4042 EDUCATION Yale Law School, J.D. Columbia College, B.A. PRACTICE AREAS Corporate Law Mergers and Acquisitions Employee Benefits and Executive Compensation Tax Tax Planning Fund Formation Executive Compensation 7
1. Recognize the thresholds for both value and control in determining whether a taxpayer must file Form 926. 2. Discern the exceptions to filing requirements and gain/loss recognition on transfers to foreign corporations. 3. Identify critical calculations that must be reported in Part IV of Form 926. 4. Demonstrate the interrelation between amounts reported on Form 926 and other foreign information reporting requirements such as FBAR/FinCEN Form 114. 5. Determine information that must be included in Part III of Form 926. 8
I. Transactions requiring Form 926 reporting. John II. What must be reported on Form 926. Ryan III. Special issues related to partnerships and hedge funds. Ryan IV. Penalties for noncompliance & Tax Planning Opportunities. John 9
There are a number of ways to capitalize foreign corporations: Cash for stock Loans for interest-bearing/interest free notes Loan Guarantees Contributions or exchanges of property (i.e. stock, tangible, and/or intangible property) (IRC Sec. 367) 10
Questions You Need to Ask 1. Have you recently transferred appreciated property to a FC? 2. If yes, how did you determine the appropriate capital gain if any? 3. Do you know if the property transfer qualified for deferred recognition or nonrecognition treatment? 11
T R A N S A C T I O N S R E Q U I R I N G F O R M 9 2 6 R E P O R T I N G 12
Under IRC Sec. 6038B(a)(1)(A), if a U.S. person transfers property to a foreign corporation in one of the following transactions, generally the transfer must be reported on Form 926: Sec. 332,336: Complete liquidation of subsidiary Sec. 351: Capital contribution or transfer to a controlled (80%) corporation solely in exchange for stock. Sec. 355: Distribution of stock or securities of a controlled corporation. Sec. 354: Exchanges of stock and securities in certain organizations. Sec. 356: Additional consideration in certain distributions (relating to 354 and 355 transactions) Sec. 361: Exchanges of property by a corporation solely in exchange for stock in a reorganization. Sec. 367(d) Outbound transfers of intangibles. DANGER! 13
The general purpose of IRC 367(a)(1) is to tax the built-in gain on appreciated property that is transferred in an U.S. outbound transaction. Specifically, IRC 367(a)(1) imposes taxation on the outbound transfer of property by a U.S. person to a FC in what would otherwise be a nontaxable exchange. If an exception to IRC 367(a)(1) is applicable, then the built-in gain on the appreciated property that is transferred in an outbound transaction will remain subject to the general nonrecognition rules. 14
A U.S. person is defined as: 1. A citizen or resident of the U.S. 2. A domestic partnership 3. A domestic corporation 4. Any estate in which foreign source income is not taxable in the U.S. 5. Any trust if a U.S. court has primary supervision and U.S. persons control substantial decisions. 15
Questions that need to be answered: 1. What is the trade or business of the transferee foreign corporation? 2. Do the activities of the transferee constitute the active conduct of a trade or business? 3. Is the trade or business conducted outside the U.S.? 4. Is the transferred property used or held for use in the trade or business? 16
Exceptions to Section 367(a)(1) gain recognition: 1. Property - Active trade or business exception (limited) a. Hot assets excluded (i.e. inventory, receivables, foreign currency, specific intangibles) b. Property previously depreciated in the U.S. c. Assets of foreign branch that incurred losses also excluded. 2. Transfer of domestic stock to foreign corporation. Must meet 5 tests: a. Required reporting. b. 50% cap on foreign stock received. c. 50% limit on total ownership by certain U.S. persons d. >5% of ownership or file GRA. e. Substantial active business. 17
A U.S. person transferring stock or securities will not have to file Form 926 if either (a) or (b) apply: a) They either own less than 5% of the vote and value of the transferee foreign corporation and: o o o o The transaction qualifies for non-recognition treatment; The transferor is a tax-exempt entity (and the income is not UBTI); The transfer was for services as described in Reg. 1.83-6 and the fair market value of the property transferred did not exceed $100,000; or The transfer is taxable and the U.S. transferor properly reported the income on its timely filed U.S. income tax return that included the year of the transfer b) They own 5% or more of the total voting power or total value of the transferee foreign corporation and: o o o The U.S. transferor was a tax exempt entity and the income was not UBTI; The transfer was taxable to the U.S. transferor and that person reported the income on its timely filed return; The transfer was for services as described in Reg. 1.83-6 and the fair market value of the property transferred did not exceed $100,000 18
The transfer of stock and securities of a foreign corporation will not be subject to treatment under Sec. 367(a) if either: The U. S. person / transferor owns less than 5% of the transferee foreign corporation after the transfer; or The U. S. person / transferor enters into a five-year gain recognition agreement (GRA) with respect to the transferred stock or securities 19
A gain recognition agreement entered into as a condition of avoiding gain recognition under the rules described at must contain the following information, with the heading GAIN RECOGNITION AGREEMENT UNDER Reg 1.367(a)-8, and with paragraphs labeled to correspond with the numbers indicated below: (i) A statement that the document submitted is the U.S. transferor's agreement to recognize gain in accordance with the requirements under Reg 1.367(a)-8. (ii) A description of the transferred stock or securities and other information as required under the rules. (iii) A statement that the U.S. transferor agrees to comply with the Reg 1.367(a)-8 conditions and requirements, including to recognize gain, waive the period of limitations, file the certification, and treat a failure to comply as extending the period of limitations on assessment of tax for the taxable year in which gain is required to be reported. (iv) statement that arrangements have been made to ensure that the U.S. transferor is informed of any events that affect the gain recognition agreement, including triggering or other gain recognition events. 20
(v) In the case of a new gain recognition agreement: (A) A description of the triggering event and the applicable exception, if any, that gave rise to the new gain recognition agreement, including the date of the event and the name, address, and taxpayer identification number (if any) of each person that is a party to the event, (B) A description of the class, amount, and characteristics of the stock, securities or partnership interest received in the transaction, and (C) A calculation of the amount of gain that remains subject to the new gain recognition agreement as a result of receipt of boot in nonrecognition transactions, distributions with respect to stock and dispositions that terminate or reduce the amount of gain subject to gain recognition agreement. A statement whether the U.S. transferor elects to include in income gain recognized in the tax year in which the gain recognition event occurs, rather than in the year of the initial transfer. (vii) A statement whether a gain recognition event has occurred during the tax year of the initial transfer. (viii) A statement describing any disposition of assets of the transferred corporation during the tax year other than in the ordinary course of business. 21
Reporting exception for certain transfers a U.S. person is required to report the transfer of cash to a foreign corporation on Form 926 if: 1. A U.S. person owns 10% of vote or value of the foreign corporation (directly, indirectly or by attribution) after the transfer; or 2. If a person transfers $100K or more within the 12-month period ending on the date of the transfer Form 926 must be filed. 22
An outbound transfer of intangible property within the meaning of Section 936(h)(3)(B) ( IRC 367(d) intangibles ) to a FC in a Section 351 or 361 transaction is not subject to IRC 367(a) but rather IRC 367(d) would apply. Transfer of intangible gives rise to payments over life of property commensurate with the income attributable to the intangible 23
Patent, invention, formula, process, design, pattern, or know-how; Copyright, literary, musical, or artistic composition; Trademark, trade name, or brand name; Franchise, license, or contract; Method, program, system, procedure, campaign, survey, study, forecast, estimate, customer list, or technical data; or Any similar item, which has substantial value independent of the services of any individual. It does not include of foreign goodwill or going concern. 24
See T.A.M. 200907024; Treas. Reg. 1.367(a)- 1T(d)(5)(iii); Hospital Corp. of America v. Commr, 81 T.C. 520 (1983); and International Multifoods v. Commr, 108 T.C. 25 (1997) 25
1. Formation of a new CFC 2. Incorporation of a foreign branch 3. Check-the-box (CTB) of an existing Disregarded Entity (DE) to be treated as a CFC. 26
USP CFC Property Property for Stock Section 351. Transfer of tangible and intangible property. Results: (1) Nonrecognition exchange (2) FOREIGN Section 367(a) xfer of appreciated property. 27
Documents that will be requested by IRS 1. Organizational Chart 2. Step plan/tax opinion, if any 3. Form 5471 (initial filing) 4. Form 926, Part III and IV 5. IRC 351 Disclosure 6. IRC 6038B Disclosure 7. GRA, if applicable 28
USP CFC FBR Property FBR Transfer property for stock under Section 351 Results: (1) Nonrecognition exchange (2) FOREIGN Section 367(a) xfer of appreciated property. 29
Documents that will be requested by IRS 1. Organizational Chart 2. Step plan/tax opinion, if any 3. Form 8832 and 8858 4. Form 5471 (initial filing) 5. Form 926, Part III and IV 6. IRC 351 Disclosure 7. IRC 6038B Disclosure 8. GRA, if applicable 30
Special rules losses of a branch that were previously deducted in the U.S. must be recaptured as income upon the transfer of branch assets to a foreign corporation (subject to limitations). The active trade or business exception does not apply to this recapture provision Previously deducted branch ordinary losses are characterized as ordinary income and previously deducted branch capital losses are characterized as long-term capital gain Gain recognition is limited to the overall limitation on the recognition of gains under section 367(a).Gains recognized shall not exceed the gains that would be received on a taxable sale of the transferred items individually and without offsetting individual losses against individual gains 31
USP CFC DE Property FBRDE Year 1 USP makes CTB of DE to make DE of USP. Year 3 USP makes CTB of DE to make CFC of USP. This is Section 351 xfer. Results: (1) Nonrecognition exchange (2) FOREIGN Section 367(a) xfer of appreciated property. 32
Documents that will be requested by IRS 1. Organizational Chart 2. Step plan/tax opinion, if any 3. Form 8832 and 8858 4. Form 5471 (initial filing) 5. Form 926, Part III and IV 6. IRC 351 Disclosure 7. IRC 6038B Disclosure 8. GRA, if applicable 33
A GAR is entered into to avoid gain recognition and must contain the following: 1. Filed in accordance with Reg. 1.367(a)-8. 2. Description of transferred stock or securities. 3. Meets requirements including recognize gain, waive SOL, file cert., etc. 4. A statement that arrangements have been made to ensure that the U.S. transferor is informed of any events that affect the GRA. 34
36
Form 926 Reporting Transfers to Foreign Corporations 1. Who must file and Form 926 filing thresholds 2. What must be reported on Form 926 37
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION WHO MUST FILE AND WHAT MUST BE REPORTED? U.S. citizen or resident, U.S. corporation, U.S. trust or estate must file Form 926 to report certain transfers of property to a foreign corporation that are described in: 1. I.R.C. 6038B(a)(1)(A) A transfer of property to a foreign corporation in an exchange described in I.R.C. 332, 351, 354, 355, 356, and 361 2. I.R.C. 367(d) A transfer of an intangible to a foreign corporation (See I.R.C. 936(h)(3)(B) for definition of intangibles.) 3. I.R.C. 367(e) I.R.C. 355 distribution and liquidation into 80% foreign parent corporation under I.R.C. Section 332 38
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION WHO MUST FILE? Transfers by U.S. or foreign partnership transferor U.S. partners of the partnership (and not the partnership itself) must file the Form 926. Each U.S. partner is treated as a transferor of its proportionate share of property that the partnership transferred to the foreign corporation. Partnerships that file a U.S. Form 1065 partnership tax return will usually provide information in the Schedule K-1 footnotes to alert U.S. partners to the potential Form 926 filing obligation. 39
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION WHAT MUST BE REPORTED? Report cash transfers if: 1. immediately after the transfer the U.S. person holds directly or indirectly at least 10% of the vote or value of the foreign corporation, or 2. The cash transferred within the 12 months before the date of transfer exceeds $100,000 USD 40
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION WHAT MUST BE REPORTED? Gain recognition agreement is filed Form 926 must be filed to report a transfer of stock or securities to a foreign corporation in all cases when a gain recognition agreement is filed under U.S. Treas. Reg. 1.367(a)-8. Check-the-box election is filed Form 926 must be filed to report a deemed contribution of assets to a foreign corporation when a foreign entity that is already in existence files a Form 8832 checkthe-box entity classification election to be classified as a foreign corporation. 41
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION 42
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 1, Part I - U.S. transferor information Line 1 Complete lines 1a through 1d if the transferor is a corporation. Line 1a - For a transfer that is part of a corporate reorganization transaction, indicate whether the transferor corporation was controlled with 80% ownership by five or less U.S. corporations. Line 1b List controlling shareholders if transferor did not exist after the transfer. Line 1c - If the transferor is a member of a U.S. consolidated group, then list the name of the parent corporation and file Form 926 with the U.S. Federal consolidated tax return. Line 1d Indicate whether I.R.C. 367(a)(5) basis adjustments were made. 43
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 1, Part I - U.S. transferor information Line 2a Provide name and FEIN of partnership that was the actual transferor. Line 2b Indicate whether the partner of the transferor partnership reported its pro rata share of gain on the transfer of partnership assets. Line 2c Indicate whether the partner is disposing of its entire interest in the partnership in the year of the transfer. Line 2d Indicate whether the partner is disposing of its entire interest in a publicly traded limited partnership in the year of the transfer. 44
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 1, Part II Transferee foreign corporation information Name and address of transferee foreign corporation Include FEIN or reference ID number Country of incorporation or formation Characterization of foreign entity under foreign law Indicate whether the transferee foreign corporation is a CFC 45
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION 46
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 2, Part III Information Regarding Transfer of Property Column (a) Date of transfer when right, title, interest and possession of cash or property passed to the foreign corporation Column (b) Description of the property Column (c) Fair market value on the date of transfer Column (d) Cost basis or adjusted basis of the property Column (e) Gain recognized on transfer Supplemental information Description of transaction that this contribution was a part of, if applicable 47
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 2, Part III Information Regarding Transfer of Property, Types of Property Cash Stock and securities Installment obligations, accounts receivable and similar property Foreign currency or property denominated in foreign currency Inventory Assets subject to depreciation recapture (Temp. Reg. 1.367(a)-4T(b)) Tangible property used in a trade business Intangible property Property to be leased (Reg. 1.367(a)-4(c)) Property to be sold (Temp. Reg. 1.367(a)-4T(d)) Transfers of oil & gas working interests (Temp. Reg. 1.367(a)-4T(e)) 48
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION 49
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 3, Part IV - Additional Information Regarding Transfer of Property Line 9 Transferor s ownership percentage before and after the transfer Line 10 State the IRC section that applies to the contribution Line 11 If a gain recognition agreement was required, a statement must be attached that describes the transfer and the amount of gain recognized, in addition to answering questions 11a through d. Line 11a - Gain recognized under I.R.C. 904(f)(3) = disposition of property used in a trade or business outside the United States (for overall foreign loss recapture rule) Line 11b - Gain recognized under I.R.C. 904(f)(5)(F) = gain on disposition of property that would be in income category as separate limitation loss Line 11c - Gain recognized under I.R.C. 1503(d) = dual consolidated loss recapture Line 11d - Exchange gain under I.R.C. 987 = gain on foreign currency translation adjustments for branch and QBU transactions 50
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 3, Part IV - Additional Information Regarding Transfer of Property Line 12 Indicate if a check-the-box election was filed and there was a deemed transfer rather than an actual transfer. Line 13 Indicate if gain on branch loss recapture or depreciation recapture was recognized. See U.S. Treas. Reg. 1.367(a)-4 and 1.367(a)-6 for other reportable items. Line 14 Indicate if exception to I.R.C. 367(a) gain recognition applies for active trade or business property. Line 15 Indicate if transfer of foreign goodwill or going concern value and provide amount transferred. Line 16 Indicate if cash was the only property transferred. Line 17 Indicate if intangible property was transferred. This relates to the I.R.C. 367(d) requirement. If yes, must attach statement describing the intangible property rights transferred per U.S. Treas. Reg. 1.6038B-1T(d). 51
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION - SUMMARY U.S. citizen or resident, U.S. corporation, U.S. trust or estate must file Form 926 to report certain transfers of property to a foreign corporation U.S. partners in U.S. partnership transferor file the Form 926 Report cash transfers if: immediately after the transfer the U.S. person holds directly or indirectly at least 10% of the vote or value of the foreign corporation, or The cash transferred within the 12 months before the date of transfer exceeds $100,000 USD File Form 926 to report transfers of stock or securities subject to gain recognition agreement Failure to file penalty is 10% of FMV of property on date of transfer limited to a maximum of $100,000 unless intentional disregard Statute of limitations is extended to three years after required information is reported 52
Form 926 Reporting Issues for Partnerships and Hedge Funds Do not file Form 926 with the U.S. partnership s U.S. Federal Form 1065 partnership tax return The U.S. partners in the U.S. or foreign partnership that transfers cash or property to a foreign corporation are considered to have transferred a proportionate share to the foreign corporation based on their respective ownership interest in the partnership. The U.S. individual or corporate partners file the Form 926 with the U.S. partner s U.S. Federal income tax return. The U.S. partner aggregates all cash transfers during the tax year (or prior 12 months) to each foreign corporation in determining the filing threshold for cash transfers. Do not aggregate transfers by one U.S. partner to all foreign corporations.only aggregate transfers with respect to each foreign corporation. 53
Form 926 Reporting Issues for Partnerships and Hedge Funds U.S. Investment Funds with Offshore Investments: Parallel Fund Structure U.S. Taxable Investors & U.S. Government Investors Non-U.S. Investors & Tax-Exempt Investors Fund (Classified as Partnership) Fund (Classified as Corporation) Non-U.S. Investments 54
Form 926 Reporting Issues for Partnerships and Hedge Funds U.S. Investment Funds with Offshore Investments: Master / Feeder Fund Structure Non-U.S. Investors & Tax-Exempt Investors U.S. Taxable Investors & U.S. Government Investors Master Fund (Classified as Partnership) Feeder Fund (Classified as Corporation) Non-U.S. Investments 55
Form 926 Reporting Issues for Partnerships and Hedge Funds Portfolio of foreign investments Investments in foreign corporations Publicly traded company Privately held company Venture capital and private equity Start-up company Passive Foreign Investment Company (PFIC) 75% of gross income from passive or investment type income 50% of assets that produce passive or investment type income Corporation with an active operating trade or business Investments in foreign partnerships Foreign hedge fund Foreign private equity fund Investments in foreign corporate debt obligations Investments in foreign government bonds Investments in foreign currencies and virtual currency Investments in foreign derivatives: forwards, futures, options, and swaps 56
Form 926 Reporting Issues and Foreign Investment Funds For foreign companies and investment funds Is the foreign company properly classified as a foreign partnership or a foreign corporation for U.S. Federal income tax purposes? Is the foreign entity formed under local law in the foreign country on the per se list of foreign corporations? If yes, then it is required to be classified as a foreign corporation. If no, then it is an eligible foreign entity that could be classified as a foreign partnership either based on the default classification rule or by filing a U.S. Federal Form 8832 check-the-box election. Does the foreign company have more than one owner with at least one owner that has unlimited liability for the debts, obligations, and liabilities of the foreign company? If yes, then the foreign company is classified as a foreign partnership for U.S. Federal tax purposes based on the default classification rule. If no, then the foreign company is only a foreign partnership if it has more than one owner and a Form 8832 election was filed. If no, the foreign company is a foreign corporation if no owner has unlimited liability and a Form 8832 election was not filed. Did the foreign company have more than one owner and file a Form 8832 election to be classified as a foreign partnership for U.S. Federal tax purposes? If yes, then it is a foreign partnership for U.S. Federal tax purposes. If no, then the foreign company is a foreign corporation if the Form 8832 was not filed. 57
Form 926 Reporting Issues for Partnerships and Hedge Funds: U.S. Tax-Exempt Investors Form 926 and U.S. tax-exempt investors in investment funds U.S. tax-exempt investors typically may include: Corporate pension plans University and college endowment funds Private foundations Charity endowment funds Individual retirement accounts (IRAs) U.S. tax-exempt investors may prefer to invest in a foreign blocker corporation instead of directly into an investment partnership to prevent U.S. taxation of unrelated business taxable income (UBTI). Generally, a U.S. tax-exempt entity s transfers of cash or property to foreign corporation are reportable on the Form 926. Form 926 reporting exception for tax-exempt entities if: The U.S. tax-exempt entity transfers stock or securities to a foreign corporation in a transaction described under I.R.C. Section 367(a), The U.S. tax-exempt entity owns less than, equal to, or greater than 5% of the total vote or value of the transferee foreign corporation after the transfer, and The U.S. tax-exempt entity did not recognize any unrelated business taxable income (UBTI) from the gain recognition on the transfer under I.R.C. Section 367(a). No specific Form 926 reporting exemption for IRAs that invest in foreign corporations Custodian or U.S. account holder should file form 926. 58
Form 926 Reporting Issues for Partnerships and Hedge Funds PFICs U.S. and foreign investment funds typically have investment portfolios that include PFIC Investments. It can only be a PFIC if it is properly classified as a foreign corporation for U.S. Federal tax purposes. The investment prospectus will typically include information for U.S. investors that advise whether the foreign investment company is a PFIC. A common misunderstanding that is it is possible to make a QEF election for any PFIC. The PFIC must agree to issue an annual PFIC statement to the U.S. shareholder which discloses the shareholder s share of PFIC ordinary earnings, gains, and distributions based on financial statements of the PFIC prepared consistently with U.S. GAAP and U.S. Federal tax principles. Not all PFICs are willing to do this. Consider PFIC/CFC overlap issues. 59
Form 926 Reporting Issues for Partnerships and Hedge Funds Schedule K-1 Disclosures U.S. investment partnerships including hedge funds are generally required to include disclosures in the footnotes to the Schedules K-1 issued to the U.S. partners which advise the partners regarding certain U.S. international information return reporting requirements resulting from the foreign investments. Form 926 information return to report transfers to a foreign corporation Form 5471 information return to report ownership of a foreign corporation Form 8621 information return to report ownership of a PFIC Form 8865 information return to report ownership of a foreign partnership Form 8938 Statement of Specified foreign financial assets U.S. Treas. Reg. Section 1.1411-10(g) Election with respect to CFC and PFIC/QEF income 60
OTHER REPORTING REQUIREMENTS FORM 8938 STATEMENT OF SPECIFIED FOREIGN FINANCIAL ASSETS U.S. individuals file Form 8938 with U.S. Federal Form 1040 Take into account value of stock in foreign corporation for Form 8938 filing threshold 1. Single or married filing separately living in United States - $50,000 at 12/31 or $75,000 at any time during calendar year 2. Married filing jointly living in United States - $100,000 at 12/31 or $150,000 at any time during calendar year If filing Form 5471, still must attach Form 8938 if within filing threshold If not filing Form 5471, must report information regarding foreign corporation on Form 8938 if within filing threshold 61
What if Form 926 Was Not Filed? If Form 926 was not filed, there could be other reporting requirements that were missed such as Forms 5471, 5472, 8938, or FinCEN Form 114 Foreign Bank Account Report, etc. Certain IRS amnesty programs may provide relief for the failure to file U.S. international tax reporting forms such as Form 926. Delinquent International Information Return and FBAR Submission Procedures if U.S. taxpayer can establish reasonable cause for the failure to file U.S. international reporting and FBAR penalties do not apply. Streamlined Domestic or Foreign Offshore Filing Procedures for U.S. Individuals with nonwillful failure to file A 5% penalty applies for the domestic offshore program. Offshore Voluntary Disclosure Program for U.S. Individuals with intentional or willful failure to file Penalties will apply. 62
64
Under IRC Sec. 6038B(c)(1), if a U.S. person fails to file a Form 926: The penalty is equal to 10 percent of the FMV of the property at the time of the exchange. The penalty shall not exceed $100,000 unless the failure with respect to such exchange was due to intentional disregard. Lose trade or business exception for recognizing gain. 65
It should be noted that once such a transfer takes place, other forms may also be required: FinCen Form 114, Report of Foreign Bank Accounts (FBAR) (formerly Form TDF 90-22.1) Form 5471, Information Return of U.S. Person with Respect to Certain Foreign Corporations Form 8938, Statement of Specified Foreign Financial Assets Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund A failure by a United States person to timely file one of the aforementioned forms or a failure to comply with the reporting requirements of these forms may result in monetary penalties, loss of foreign tax credits, and extension of the statute of limitations. 66
Extension of Statute of Limitations General rule: Taxes are required to be assessed within 3 years after the return is filed. For certain foreign filings, the limitations period does not expire for the assessment of income tax with respect to the return upon which the information should have been reported until three years after the required information is provided to the IRS. For returns filed after March 18, 2010, and returns filed on or before March 18, 2010 as to which the SOL has not yet expired as of March 18, 2010, the extension of the SOL applies to any tax return, event or period to which the unreported information relates: If failure to provide the required information was due to reasonable cause and not willful neglect, the extended time for assessment will be limited to the unreported information. Under Section 6662(j), an additional 40% penalty may be imposed on any underpayment resulting from an undisclosed foreign financial asset. This additional penalty applies to any asset that was required to be reported under IRC Section 6038B if the taxpayer failed to disclose the information. The penalty will not be imposed if the United States person can demonstrate that the failure was due to reasonable cause and the taxpayer acted in good faith. 67
Comparison: https://www.irs.gov/businesses/comparison-ofform-8938-and-fbar-requirements 68
69
CFC USP Loan Capitalize Subsidiary via IC loan. Subject to Section 482 and withholding not Section 367. Results: (1) Deduction for interest on CFC books (2) immediate return of capital to USP. Caution: Be aware of thin-capitalization rules and Section 956. 70
CFC USP Royalty Grant rights to use intangible via royalty agreement. Subject to Section 482 and withholding not Section 367(d). Results: (1) Deduction for royalty on CFC books (2) immediate return of capital to USP. Caution: Be aware of thin-capitalization rules. 71
Value pre-existing intangibles and foreign entity purchases intangibles based on value. Reg. Section 1.482-7(g)(2) See Amazon.com v. Commissioner and Veritas case. 72